The present invention relates generally to methods and apparatuses for managing portfolios of securities for small investors, and more particularly to a method and apparatus for managing a portfolio of securities for a small investor, in which the small investor is able to measure, test and manage taxable events caused by buying, holding and selling securities within the portfolio.
Currently, investors seeking to transact in securities to obtain a specific tax result such as a certain amount of capital gain or loss must keep track of the specific tax lots of the security they own and then designate the appropriate lots to obtain the desired result, with the broker then required to confirm back to the investor that the specific designated securities have been sold. Often, the paper work, record-keeping and tax analysis required is beyond the means of most smaller investors. The broker or whoever holds the securities must also keep track of the securities as specifically denominated securities so as to be able to track the tax effects and be certain that the correct securities are being sold. If the securities cannot be tracked, then the first-in, first-out method is supposed to be used for calculating taxable gain or loss; for mutual finds, an average basis in the mutual fund shares held by the investor may be and usually is used for such calculation.
An investor buying securities may have both a gain and a loss, or only a gain or only a loss, or no gain or loss, in any particular security. As an example, an investor who purchased 11 lots of 100 shares of Motorola stock over the course of ten weeks at prices of $40, $42, $44 $46, $48, $50, $52, $54, $56, $58 and $60 would have an overall gain on the entire 1100 shares of Motorola if the current price was above $50, an overall loss if the current price was below $50 and no gain or loss if the price was at $50. However, looking at each lot separately, if the current price was $50, the investor would have a gainxe2x80x94if he soldxe2x80x94any of the lots bought for less than $50, a lossxe2x80x94if he soldxe2x80x94any of the lots bought for more than $50 and no gain or loss if he sold the one lot purchased at $50 or the lot bought at $48 along with the lot bought at $52, etc. Similarly, if the current price was $56, the portfolio as a whole would show a gain, but the investor could achieve a loss if he sold at that price only those lots acquired with a tax basis above $56 (i.e., the lots acquired for $58 and $60), and none others or only those that did not eliminate the gain (such as the lot at $56 and the lot at $54 along with the lots at $58 and $60). Obviously, depending on what is sold, the tax results change, as does the amount of cash generated by the transaction. It is very important to investors to be able to control both the cash to be received and the taxes to be paid within the limits of the economic gain and loss they have achieved. If an investor can obtain $100 cash without a taxable gain, then that is worth more (by the amount of the tax bracket times the cash received multiplied by the time value of the money for so long as the tax remains unpaid) than obtaining $100 cash where current taxes need to be paid on that cash.
It is very difficult for an investor to keep track of all these separate lots and results if he has multiple securities bought at a variety of times at different prices, especially when the selling prices of the securities changes frequently, thereby changing the results frequently. Moreover, it is difficult to recognize the relationship between the amount of cash that can be received from the sale and the tax effects, and it is difficult in the case of multiple securities and multiple lots to communicate the information to a broker easily to ensure that the correct securities are sold at the specified prices to effect the desired result.
In a system like the one that is described in U.S. patent application Ser. No. 09/139,020 an investor is permitted easily to engage in strategies such as xe2x80x9cdollar averagingxe2x80x9d where a small, but constant, amountxe2x80x94such as $100 or $1,000xe2x80x94is invested periodically (e.g., each week or month) in a multitude of securities at whatever the prevailing price may be. In that event, it would be almost impossible for an investor currently to maintain the appropriate tax records and to have a system that would allow the investor to understand the tax and linked cash implications of possible transactions and then obtain the desired tax and cash results, especially where the capital assets being transacted are bought and sold at prices that change frequently (such as securities). In addition, it is very difficult for an investor to understand the remaining available tax-cash positions that result after a change in a complex portfolio due to the sale of selected securities from, or purchase for, the portfolio. In addition, it is very difficult for an investor to understand and manage the tax-cash implications that result from combining potentially short and long term capital asset tax implications with gains and losses and then to be able to obtain the desired tax results by executing transactions that provide the desired results. It is also very difficult for an investor to understand the interactivity of the tax implications from transactions in selected assets with the overall tax results that the investor incurs taking into account other taxes, such as income or other transactions in other assets or liabilities. It is also very difficult for an investor to understand the effects that time will have in converting short-term gains into long-term gains in a plurality of securities or trade lots bought at different times. Finally, it is difficult to determine these tax-ash implications, and their related portfolio implications, in the context of a managed portfolio of assets.
The present invention is therefore directed to the problem of developing a method and apparatus for enabling a small investor with a portfolio of securities to understand and manage the related taxable events and cash implications created by buying and selling securities (which could include mutual funds) in a complex portfolio.
The present invention solves this problem by providing a presentation and graphical display format directly linked to a system for managing the portfolio of securities enabling the investor easily to make a selection and place an order as to the shares to be sold for the desired cash and tax results.
According to the present invention, a graphical display interface provides the investor with a graph showing, in the event of a sale of selected securities, the cash to be received on, for example, the horizontal axis, and the tax result on, say the vertical axis. The investor is further permitted to click on the discrete points that are available and obtain information as to the specific securities underlying the point. The investor is further permitted to enter orders to effect transactions in those securities.
The points that are available depend on the granularity of the purchases that have been made by the investorxe2x80x94such as how many purchases there were and at how many different prices, and how close together the prices are, etc. The graph is generated by accessing the database, which could be based on records held by a custodian (such as a bank, a broker or some other intermediary), or on the investor""s own records, if the investor is keeping track of the information itself. In generating the graph, each point available for selection represents an intersection of a cash and tax result based on the investor""s purchases and the current expected sales price for the securities. Once the investor selects his preferred outcome, the system notes those securities that correspond to that outcome for sale. The noted securities are then sold in accordance with the seller""s instructions and pursuant to whatever system the seller is using for securities dispositions (if not the invention disclosed in the above mentioned patent applications), with the required confirmations generated by the selling system.
This graphical user interface and connection and linkage to the present invention system or some other record keeping, order handling and execution system resolves the problem of making complex and difficult determinations to achieve a cash-tax goal with a simple and single click of a mouse.
The present invention provides a method for enabling a user to determine the tax consequences from selling multiple assets/liabilities. The method includes the steps of: a) determining the potential tax consequences that would result from trading various combinations of the plurality of assets/liabilities, in which each of the potential tax consequences represents the potential tax consequence that would result from trading one particular subset of assets/liabilities; b) determining the potential proceeds for each of the potential tax consequences that would result from trading the various combinations of the assets/liabilities; and c) displaying the potential proceeds and the potential tax consequences in a graphical format.
In an advantageous implementation of the method of the present invention, the method further includes the step of automatically trading one of the subsets of assets/liabilities based upon a desired tax consequence selected by the user.
According to yet another advantageous implementation of the method of the present invention, the method further includes the step of displaying the series of sums in a graphical format, in which one axis represents the potential proceeds and the other axis represents the potential tax consequences from selling the assets/liabilities, in which each potential trade of a particular subset of the assets/liabilities is plotted as a point in the graph, and each point has an attribute related to both a potential proceeds and a potential tax consequence resulting from a trade of the associated particular subset of assets/liabilities.
According to yet another aspect of the present invention, the method further includes the step of maintaining an association of each asset/liability to each of the points plotted in the graph displayed to the user.
In another advantageous implementation of the above method of the present invention, the method further includes the step of displaying the series as above, but displaying it with respect to each security owned by the user as a separate security noted on a graph on a three dimensional array, where one axis represents the capital gain or loss and the other axis represents proceeds from selling the securities and the third axis shows that representation for each particular issue of security.
Yet another particularly advantageous implementation of the above method of the present invention includes the step of enabling the user to select one of the points in the graph being displayed and then identifying to the user which of the securities must be sold to obtain a desired tax treatment.
Further, the method of the present invention also includes the step of highlighting significant points and lines in the graph. In this embodiment of the method of the present invention, the significant points include a maximum potential gain, a maximum potential loss, and a point where the proceeds are maximum while remaining tax neutral, and a point where the proceeds are maximum. The significant lines include where potential proceeds are realized with a zero tax consequence, where potential proceeds can be received with a specified amount of potential tax consequence, and where potential tax consequences can be achieved with a specified amount of potential proceeds.
According to yet another aspect of the present invention, the method further includes the steps of maintaining a basis and date of acquisition for each of the assets/liabilities in the portfolio, obtaining a trading price for each of the assets/liabilities in the portfolio, and displaying the potential proceeds and the potential tax consequences on a graph. In the graph, one axis represents the potential proceeds and another axis represents the potential tax consequence that would result from trading particular subsets of assets/liabilities, in which each potential trade of a particular subset of the assets/liabilities is plotted as a point in the graph, and each point has an attribute related to both a potential proceeds and a potential tax consequence resulting from a trade of the associated particular subset of assets/liabilities. The method further includes the steps of maintaining an association of each security to each of the points plotted in the graph, enabling the user to select one of the points in the graph thereby indicating the user""s desired tax consequence and desired proceeds, identifying to the user which of the assets/liabilities must be traded to obtain the user""s desired tax consequences and desired proceeds, and then executing a trade of the assets/liabilities identified upon confirmation by the user.
Another implementation of the method of the present invention includes the steps of enabling the user to indicate a desired proceeds and outputting a list of assets/liabilities to sell to obtain the desired proceeds while incurring a potential tax consequence.
According to yet another implementation of the present invention, the method further includes the steps of: d) determining for each security (on a share, or fractional share basis, if necessary) whether the security has been held for a sufficient time to qualify for long-term capital gain treatment (determined by comparing the date of acquisition of such security with the date of expected sale of such security and calculating whether the difference is sufficient to so qualify) and e) showing as (I) two separate graphs the tax-cash positions for short-term and long-term capital tax treatment or (ii) one composite graph of two such graphs superimposed on each other or (iii) one graph the combined effect utilizing then applicable tax rules showing the results of a combination of various sales involving both short and long-term capital asset qualified securities or (iv) a three dimensional graph showing long-term capital gain or loss or one axis, short-term capital gain or loss on another axis and proceeds to be realized on a third.
According to yet another implementation of the present invention, the method further includes enabling the user to time shift the portfolio by specifying a date and having the capital gain or loss reflected in the portfolio and current prices transformed to long-term gain from short-term gain as time is deemed to be passing regarding the portfolio""s holdings. This would be accomplished by having the database note the date of acquisition of the underlying security trade. The database would also determine the date, according to then current tax rules as provided in the program running the current invention (which such program could be updated by accessing a web site that updates the program embodying the current invention), or with such dates as inputted from the user or as downloaded or accessed from a source such as a web site that updates the program embodying the current invention or that maintains the database, as to when the asset would be held sufficiently long enough to qualify for long-term capital gains treatment. In this manner, the tax consequences display presented to the user can be time shifted to indicate the consequences that would occur if sales were made at times subsequent to the current date at which the program is running.
According to yet another implementation of the present invention, the method further includes a time-based tax-price differential calculator. This calculator would determine the tax savings resulting from the passage of time in the conversion of short-term gains to long-term gains in the event of a sale of a security and determine the reduction in price from current price levels that would be needed to offset the tax savings. In this manner, a user can quickly determine the potential gain from waiting to engage in a transaction that would produce a long-term capital gain instead of a short-term capital gain and the per share reduction in price that would have to occur from current price levels to eliminate the after-tax benefit resulting from such transformation. By way of example, a user may own a share of a security currently trading at $300 with a basis of $50. If that share when sold would generate a short-term taxable gain, with an assumed tax rate of 40%, then the tax would be $100 when the share was sold (($300 (the current sale price) minus $50 (the basis)) times 40% equals $100), with $200 of after tax proceeds being realized ($300 minus the tax of $100). By contrast, if the share when sold would generate a long-term taxable gain taxed at, say, only a 20% rate, then the tax would be only $50 when the share was sold (($300xe2x88x92$50) times 20%=$50), with $250 of after tax proceeds being realized ($300xe2x88x92$50). Consequently, the share would have to fall in price to $237.50 ($237.50xe2x88x92($237.50 xe2x88x92$50)*20%=$200) from $300 to have made it worthwhile to have sold now and recognize short-term capital gains rather than waiting, if possible, until the gain was long-term (not taking into account the time value of money, which could also be included). Many investors would find it very surprisingxe2x80x94in fact extraordinarily surprisingxe2x80x94to realize that, in this example, a share owned by the investor would have to decrease from $300 to under $240 just to compensate for the tax differential. The ability to quantify and visualize this differential will be very valuable to investors.
According to yet another implementation of the present invention, the method further includes the steps of exporting the information regarding securities sold pursuant to the steps in the preceding paragraphs to a tax program, such as Intuit""s TurboTax(copyright) or Kiplinger""s TaxCut(copyright), in a format that automatically inserts such information in the appropriate places for inclusion in such programs for reporting to the appropriate governmental agencies.
According to yet another implementation of the present invention, the method further includes the steps of receiving information from a tax program, such as Intuit""s TurboTax(copyright) or Kiplinger""s TaxCut(copyright), and comparing it to the database information described above to identify potential tax savings from engaging in a transaction involving any of the capital assets in the database.
The present invention also includes a computer based program for enabling a user to manage his/her tax consequences from trading assets/liabilities held by the user. The program includes a tax basis registry storing a basis for each asset/liability upon entry of the asset/liability into the program by the user. In addition, the program includes a tax consequence calculator routine calculating a potential tax consequence for each asset/liability in the registry selected by the user for potential trade. Further, the program has a tax graph calculator routine calculating a graphical representation of an overall tax consequence for each possible combination of trade sale of the selected assets/liabilities. Finally, the program includes a graphical user interface interacting with the user to enable the user to enter basis, date of acquisition, and other information for each asset/liability to be managed by the program, to enable the user to select specific assets/liabilities for potential sale, and to enable the user to indicate a desired tax consequence, said graphical user interface further displaying the graphical representation of the tax consequence calculated by the tax graph calculator routine, listing assets that must be traded to meet the tax consequences desired by the user, and enabling the user to authorize trading of the specific assets/liabilities (which could be pursuant to a limit order, market order or otherwise), and providing the user confirmation of the trade of the specific assets/liabilities.
Another particularly advantageous implementation of the above system of the present invention provides for a means of calculating the expected tax required to be paid, or expected tax benefit or credit expected to be earned, in connection with any transaction or proposed series of transactions. The system would include an estimate from the user or from a program such as Intuit""s TurboTax(copyright) as to the marginal tax rate of the user and then calculate the tax effect based on the capital gain or loss (short or long term) at that marginal rate.
According to yet another implementation of the above system of the present invention, the system would interact with a program that calculates the taxable effect of a transaction based on the other taxable transactions, income and other taxable items known to the user or expected to be engaged in by the user, either as stored in a program such as Intuit""s TurboTax(copyright) or otherwise inputted into the program by the user.
According to yet another implementation of the above system of the present invention, the system would also employ an xe2x80x9cexpert agentxe2x80x9d for managing the tax effects and alerting the user to various strategies that the user may wish to employ. Specifically, the present invention incorporates a system that monitors the user""s tax position by comparing the capital tax effects from various proposed or available transactions and determining whether any such transactions achieve goals set by the user, including specified levels of capital gain or loss (short and/or long term), specified levels of proceeds, or specified levels of taxable effects. The system then alerts the user as to the satisfaction of such goals by a pop-up window, by an e-mail alert, by providing a notice in a file, or through any of a number of other known means for communicating with a user of a computer program, that such a transaction can now be accomplished. The user can then act, or not, on the information provided. The system can also be set by the user to send an order to the electronic trading system (described below) to execute the transaction identified by the xe2x80x9cexpert agentxe2x80x9d with or without any user intervention. In this manner, the user can satisfy various tax-cash goals automatically with transactions being executed automatically. Similarly, the system can be configured so that a specified amount of securities are sold each month or week, with the system doing so in a manner that attempts to reflect a specified tax goal, such as sell those securities that result in $500 of proceeds and that produce the smallest taxable gain, or the largest loss, etc. while maintaining a reasonably diversified portfolio.
The present invention also includes a system for enabling a user to determine the tax consequences from trading multiple assets/liabilities within a portfolio of assets/liabilities and to obtain a desired tax consequence. The system of the present invention includes a processor determining the potential tax consequences that would result from trading various combinations of the assets/liabilities. Each of the plurality of potential tax consequences represents the potential tax consequence that would result from trading one particular subset of assets/liabilities. The processor also determines the potential proceeds for each of the potential tax consequences that would result from trading the various combinations of the assets/liabilities. The system includes a display coupled to the processor for displaying in a graphical format the tax consequences and the proceeds corresponding with each of the tax consequences determined by the processor. Further, the system includes a user input device being coupled to the display indicating a user desired tax consequence, and a portfolio manager being coupled to the user input device and enabling a user to prepare a trade of assets/liabilities to obtain a user desired tax consequence.
One particularly advantageous implementation of the above system of the present invention includes an electronic trading system being coupled to the portfolio manager, wherein the portfolio manager forwards the trade of the assets/liabilities to the electronic trading system, which executes the trade. In this case, the electronic trading system passes trading information regarding the assets/liabilities to the portfolio manager.
Another particularly advantageous implementation of the above system of the present invention provides that the display displays the potential proceeds and the potential tax consequences on a graph with one axis representing the potential proceeds and another axis representing the potential tax consequence that would result from trading particular subsets of assets/liabilities. In this graph, each potential trade of a particular subset of the assets/liabilities is plotted as a point in the graph, and each point has an attribute related to both a potential proceeds and a potential tax consequence resulting from a trade of the associated particular subset of assets/liabilities.
Yet another particularly advantageous implementation of the above system of the present invention includes a database for maintaining an association of each asset/liability to each of the points plotted in the graph that is displayed to the user. The database, if linked to a server, could also be associated with other information regarding the security (such as an analyst report, or 10-K, etc. so that when the security is shown the user could also obtain other information about the security).
Another particularly advantageous implementation of the above system of the present invention provides a user selection routine enabling the user to select one of the points in the graph being displayed, and the processor further comprises a routine identifying to the user via the display which of the assets/liabilities must be traded to obtain a desired tax consequence and a corresponding desired proceeds.
Yet another particularly advantageous implementation of the above system of the present invention further includes a database maintaining a basis and acquisition date for each security in the portfolio. The portfolio manager obtains a selling price for each of the securities in the portfolio. The display displays the potential proceeds and the potential tax consequences on a graph with one axis representing the potential proceeds and another axis representing the potential tax consequence that would result from trading the various subsets of assets/liabilities. Each potential trade of a particular subset of the assets/liabilities is plotted as a point in the graph, and each point has an attribute related to both a potential proceeds and a potential tax consequence resulting from a trade of the associated particular subset of assets/liabilities. The database maintains an association of each security to each of the points plotted in the graph displayed to the user. The user input device enables the user to select one of the points in the graph being displayed thereby indicating the user""s desired tax consequence and corresponding desired proceeds. The portfolio manager identifies for the user which of the assets/liabilities must be traded to obtain the desired tax consequence and corresponding desired proceeds, and executes a trade of the assets/liabilities identified upon confirmation by the user and confirms such trade to the user.
According to yet another aspect of the present invention, an apparatus for enabling a user to determine capital asset tax consequences from selling securities within a portfolio of securities and to obtain a desired capital asset tax consequence and a desired proceeds, includes a calculating means, a determining means, an obtaining means, and a display means. The means for calculating calculates a potential capital asset tax consequence and a potential proceeds resulting from trading each of the securities. The means for determining determines a series of sums of the capital asset tax consequences that would result from various combinations of trades of particular subsets of the securities. The means for obtaining obtains the potential proceeds associated with each of the series of sums resulting from the various combinations of trades of the particular subsets of the securities used by the determining means. The means for displaying displays to a user in a graphical format the series of sums and the associated potential proceeds in a graphical format. In this graph, one axis represents the capital asset tax consequence and another axis represents the proceeds resulting from trading the securities. Each of the sums is plotted as a point in a graph, and each point has an attribute related to a potential capital asset tax consequence and another attribute related to the potential proceeds resulting from a trade of the securities underlying each of the points.
Another particularly advantageous implementation of the above device of the present invention further includes a means for executing a sale of the securities identified upon affirmation by the user and to be able to confirm the sale of the particular securities selected by the user.
Yet another particularly advantageous implementation of the above system of the present invention further includes a means for continuously updating the graph both upon receipt of new market data regarding the securities in the portfolio or upon a change in the securities comprising the portfolio (including when securities are sold pursuant to the use of the present invention). The system could also be updated to reflect changes that are incorporated in new versions of the program that may be accessed at that time to reflect changes in tax rates, tax policies or other relevant factors.
Yet another particularly advantageous implementation of the above device of the present invention further includes a means for distinguishing between longterm and short-term capital gain and loss, and depicting the two as two separate graphs or a superimposed combination of graphs or by combining the two types of capital asset gain or loss (i.e., short or long) according to then applicable tax rules to create a combined net effect for various combinations of sales.
According to yet another particularly advantageous embodiment of the present invention, the above device includes a means for maintaining an association of each security to each of the points plotted in the graph being displayed to the user, and a means for enabling the user to indicate a desired tax consequence by selecting one of the points in the graph and identifying for the user which of the securities must be sold to obtain the desired tax consequence